Back in Black...



As I write this email, US stocks are back in the black year-to-date as the wild sessions continue. We want to remind everyone that market pull backs are normal and healthy in a bull market. For example in the 4 year period between 2004 and 2008 there were a number of 6-8% corrections. It is also natural to see volatility move higher as the market approaches "Late Cycle" which is where we believe we are headed.


This pullback shouldn’t be a surprising given the extended period of low volatility, the market’s extreme overbought condition, and investor sentiment which was overly optimistic. The good news is that we’ve seen a reset of these conditions with volatility spiking, the market becoming oversold, and sentiment becoming pessimistic. In addition, the market demonstrated signs of capitulation on Monday’s drawdown which often happens near a bottom.


For many reasons, we don’t think that this pullback is the end of the bull market:


· Credit has not deteriorated in a significant way
· Financial conditions remain accommodative globally
· There are no signs of recession that we see
· Sector leadership is still cyclical (even in the downturn)
· Financial stocks continue to demonstrate strong relative performance & leadership
· The majority of S&P companies have had positive earnings surprises (i.e., positive earnings revisions)


However, we also don’t think that we’re off to the races. The market often bounces when we see such a large correction, but there is often a longer workout period that can involve retesting the lows before the market begins its next up leg. That would be our base case view, but there is also the possibility that the market quickly goes onto making a new high.


We continue to believe that we are entering the latter part of the business cycle which can be powerful. We are in a market that will be driven by strong corporate earnings and cyclical leadership until there are signs of deterioration in the broader economy. Accommodative financial conditions, have provided a tailwind for stocks, which we do not see materially changing in the short term. However, we’ll continue to watch the data, and reassess our positioning on an ongoing basis. For now, we think the best course of action is to hold tight and stay the course.


Please contact me if you have any questions.




Andersen Midgley Wealth Counsel



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